World Must Prioritize Productivity Reforms to Revive Medium-Term Growth
IMF Blog, April 10, 2024
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- Authors: Nan Li, Diaa Noureldin
- Published: April 10, 2024
Overview
- Global growth—stripped of cyclical ups and downs—has slowed steadily since the 2008-09 global financial crisis.
- Without policy intervention and leveraging emerging technologies, the stronger growth rates of the past are unlikely to return.
- Five-year ahead projections in the latest World Economic Outlook indicate global growth will slow to just above 3 percent by 2029.
- Growth could drop by about a percentage point below the pre-pandemic (2000-19) average by the end of the decade.
- A persistent low-growth scenario, combined with high interest rates, could put debt sustainability at risk and discourage investment, potentially deepening the slowdown.
- Geoeconomic fragmentation and harmful unilateral trade and industrial policies are strong headwinds.
Drivers of the slowdown
- Key drivers of economic growth: labor, capital, and total factor productivity (TFP).
- More than half of the growth decline since the crisis was driven by a deceleration in TFP growth.
- TFP increases with technological advances and improved resource allocation across firms.
- Resource misallocation has increased, dragging down TFP and global growth:
- If resource misallocation hadn’t worsened, TFP growth could have been 50 percent higher.
- Demographic pressures and weak business investment also contributed:
- Shrinking working-age populations in major economies have weighed on labor growth.
- Weak business investment has stunted capital formation.
Medium-term pressures
- United Nations projections imply demographic pressures will increase in most major economies, causing an imbalance in world labor supply.
- Working-age population trends:
- Increase in low-income and some emerging economies.
- Labor squeeze in China and most advanced economies (excluding the United States).
- By 2030, the growth rate of the global labor supply is expected to slide to just 0.3 percent.
- Some resource misallocation may self-correct over time, but structural and policy barriers will slow the process.
- Technological innovation may mitigate the slowdown, but overall TFP growth is likely to continue to decline due to:
- Increasing difficulty of technological breakthroughs.
- Stagnation in educational attainment.
- Slower convergence of less developed economies.
- Absent major technological advances or structural reforms, global economic growth is expected to reach 2.8 percent by 2030, compared with a historical average of 3.8 percent.
Policy scenarios and quantified impacts
- The analysis evaluates policies affecting labor supply and resource allocation amid AI advancement, public debt overhang, and geoeconomic fragmentation.
- Scenarios considered include ambitious but achievable policy shifts to address resource misallocation by improving:
- Flexibility of product and labor markets.
- Trade openness.
- Financial development.
- Labor supply and participation policies considered include:
- Reforming retirement and unemployment benefits.
- Supporting childcare.
- Expanding re-training and re-skilling programs.
- Improving integration of migrant workers.
- Removing social and gender barriers.
- Estimated impacts:
- Focused policy actions to enhance market competition, trade openness, financial access, and labor market flexibility could lift global growth by about 1.2 percentage points by 2030.
- The potential of AI to boost labor productivity is uncertain but possibly substantial, possibly adding up to 0.8 percentage points to global growth depending on adoption and workforce impacts.
Policy recommendations and priorities
- Prioritize reforms that enhance productivity and fully leverage AI to revive medium-term growth.
- Address resource misallocation by removing persistent barriers that favor or penalize firms irrespective of productivity.
- Implement policies to improve:
- Market competition.
- Trade openness.
- Financial access.
- Labor market flexibility.
- Support labor-supply measures that expand workforce participation and integration (childcare, retraining, migrant worker integration), acknowledging their comparatively modest benefits versus productivityfocused reforms.
- Pursue innovation-driven policies in the long run to sustain global growth.
Based on Chapter 3 of the World Economic Outlook, “Slowdown in Global Medium-Term Growth: What Will it Take to Turn the Tide?”, reflecting research by Chiara Maggi, Cedric Okou, Alexandre B. Sollaci, and Robert Zymek.
Content in this bundle
- Chapter 3